Fannie Mae Makes Underwriting Changes

Fannie Mae and Freddie Mac, the two largest government-sponsored mortgage companies, have made significant changes to their underwriting standards that allow more Americans to qualify for home loans. These changes were implemented in response to the new credit score models adopted by the major credit reporting agencies, FICO, and VantageScore, in 2020.

The adoption of trended data is the most significant change made by Fannie Mae and Freddie Mac. Trended data is a comprehensive view of a borrower's credit history, which analyzes their credit behavior over time. It includes information such as the amount of debt carried month-to-month, the amount of available credit used, and the consistency of payments. By including trended data, Fannie Mae and Freddie Mac can more accurately assess a borrower's creditworthiness and ability to repay a loan. This change opens opportunities for millions of Americans who may have previously been denied a mortgage due to their credit scores or other factors.

In addition to the changes made by FICO and VantageScore, Fannie Mae and Freddie Mac have also implemented their own guidelines to further expand access to mortgage loans. For example, they are now accepting borrowers with higher debt-to-income ratios and offering more flexible income documentation requirements.

Another significant change made by Fannie Mae and Freddie Mac is the reduction of penalties for medical debt. Medical debt will no longer have as much of a negative impact on a borrower's credit score as it did previously. This is significant because medical debt is often incurred unexpectedly and is not always within the control of the borrower. The reduction in penalties for medical debt opens up more opportunities for low and moderate-income borrowers, first-time homebuyers, and borrowers with limited credit histories or past credit issues.

In addition to the above changes, Fannie Mae and Freddie Mac have also implemented a new credit report system called the "bi-merge" credit report. This system combines a traditional credit report with a second credit report that includes non-traditional credit information, such as rental payments, utility bills, and cell phone payments. This allows borrowers who may not have a traditional credit history to still demonstrate their creditworthiness.

The bi-merge credit report system is designed to provide a more accurate reflection of a borrower's creditworthiness, particularly for those who have limited credit histories or who have traditionally been underserved by the mortgage industry. It is an innovative approach that reflects the changing nature of credit and the increasing importance of non-traditional credit information in assessing a borrower's ability to repay a loan.
These changes made by Fannie Mae and Freddie Mac are significant because they open up homeownership opportunities for millions of Americans who may have previously been denied a mortgage due to their credit scores or other factors. They also demonstrate the mortgage industry's commitment to addressing issues of credit access and equity in lending.

However, it is important to note that while these changes are designed to expand access to mortgage loans, they do not eliminate all risks associated with lending. Fannie Mae and Freddie Mac still have guidelines that borrowers must meet, and lenders still have the ability to set their own credit standards and criteria.

In conclusion, Fannie Mae and Freddie Mac have made significant changes to their underwriting standards in response to the new credit score models implemented by FICO and VantageScore. The adoption of trended data, the reduction of penalties for medical debt, and the implementation of the bi-merge credit report system provide more opportunities for Americans to achieve homeownership. These changes are significant because they open up opportunities for low and moderate-income borrowers, first-time homebuyers, and borrowers with limited credit histories or past credit issues. However, lenders still have the final say in lending decisions, and borrowers must meet certain guidelines to qualify for a mortgage loan. 
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Matthew Mrozek, Research Analyst with JD Koontz, LLC provided significant assistance in writing this blog post.